INDEX NO. 651668/2014
FILED: NEW YORK COUNTY CLERK 08/15/2014 11:49 PM
NYSCEF DOC. NO. 87
RECEIVED NYSCEF: 08/15/2014
SUPREME COURT OF THE STATE OF NEW YORK
COUNTY OF NEW YORK
CITY TRADING FUND, LAWRENCE BASS
AND ANDRES CARULLO AS ALL OF THE
PARTNERS OF CITY TRADING FUND, A
GENERAL PARTNERSHIP, SUING ON
BEHALF OF THEMSELVES AND ALL OTHERS Index No. 651668/2014
(Kornreich, J., Part 54)
SIMILARLY SITUATED,
Plaintiffs,
v.
C. HOWARD NYE, STEPHEN P. ZELNAK, JR.,
SUE W. COLE, DAVID G. MAFFUCCI,
WILLIAM E. MCDONALD, FRANK H.
MENAKER, JR., LAREE E. PEREZ, MICHAEL J.
QUILLEN, DENNIS L. REDIKER, RICHARD A.
VINROOT, MARTIN MARIETTA MATERIALS,
INC., and TEXAS INDUSTRIES, INC.,
Defendants.
DEFENDANTS’ JOINT PAPER REGARDING
THE POLICY IMPLICATIONS OF THIS ACTION AND ITS SETTLEMENT
TABLE OF CONTENTS
Page
TABLE OF AUTHORITIES .......................................................................................................... ii
I.
II.
III.
POLICY IMPLICATIONS OF THE “BRUALDI BRAND” OF LITIGATION ................3
A.
The Brualdi Entities Exist Only to Enrich the Brualdi Law Firm. ..........................4
B.
The Claims Brought by the Brualdi Entities Are Meritless Settlement
Generators. .............................................................................................................10
1.
Plaintiff’s unjustifiable delay belies its claim to represent the
interests of shareholders. ............................................................................11
2.
Plaintiff should not have brought his claims in New York. .......................14
3.
Plaintiff’s claims were meritless. ...............................................................15
WHY DEFENDANTS HERE SETTLED .........................................................................15
A.
Risks to the Transaction .........................................................................................16
B.
Transaction-related Costs Imposed by Delay or Uncertainty ................................17
C.
Litigation Costs ......................................................................................................20
THE COURT’S ROLE IN SETTLEMENTS ....................................................................21
i
TABLE OF AUTHORITIES
Page(s)
Cases
Abbey v. Montedison S.p.A., 143 Misc. 2d 72 (Sup. Ct. N.Y. Cnty. 1989) ...................................17
Alessi v. Beracha, 244 F. Supp. 2d 354 (D. Del. 2003) .................................................................14
Broadway Capital v. Benton, et al, Index No. 650143/2013 (Sup. Ct. N.Y. Cnty. Feb. 6,
2013) ..........................................................................................................................................8
Cashstream Fund v. Huston, No. 14-cv-37 (Ohio Ct. of Common Pleas Feb. 18, 2014) ...............5
Continuum Capital v. Nolan, No. 5687-VCL, Tr. at 12-13 (Del. Ch. Feb. 15, 2011) ...................11
Dennis v. Buffalo Fine Arts Acad., 836 N.Y.S.2d 498 (Table) (Sup. Ct. Erie Cnty. 2007)...........18
Drulias v. ADE Corp., C.A. No. 06-11033-PBS, 2006 WL 1766502 (D. Mass. June 26,
2006) ........................................................................................................................................13
Equity Trading v. Ginsburg, No. 14-cv-00499-RWS (S.D.N.Y. Feb. 25, 2014) ............................8
H.F. Ahmanson & Co. v. Great W. Fin. Corp., Civ. A. No. 15650, 1997 WL 305824
(Del. Ch. June 3, 1997) ............................................................................................................18
In re CheckFree Corp. S’holders Litig., Civ. A. No. 3193-CC, 2007 WL 3262188 (Del.
Ch. Nov. 1, 2007).....................................................................................................................17
In re Delphi Fin. Grp. S’holder Litig., Civ. A. 7144-VCG, 2012 WL 729232 (Del. Ch.
Mar. 6, 2012)............................................................................................................................17
In re Dollar Thrifty S’holder Litig., 14 A.3d 573 (Del. Ch. 2010) ................................................19
In re SS & C Techs., Inc. S’holders Litig., 911 A.2d 816 (Del. Ch. 2006) ....................................10
In re SS & C Techs., Inc. S’holders Litig., 948 A.2d 1140 (Del. Ch. 2008) ................................5, 6
Klein v. Robert’s American Gourmet Food, Inc., 28 A.D.3d 63 (2d Dep’t 2006) ..................22, 23
Minzer v. Keegan, No. CV-97-4077 (CPS), 1997 WL 34842191 (E.D.N.Y. Sept. 22,
1997) ............................................................................................................................18, 19, 20
Oliver Press Partners, LLC v. Decker, No. 1817-N, 2005 WL 3441364 (Del. Ch. Dec. 6,
2005) ........................................................................................................................................14
Rational Strategies Fund v. Hill, No. 651625/2013, 977 N.Y.S.2d 669 (N.Y. Sup. Ct.
2013) ........................................................................................................................................15
ii
Page(s)
Sector Grid Trading Co. v. Ford, Tr. at 9-10, No. 650121/2013 (Sup. Ct. N.Y. Cnty. Feb.
15, 2013) ....................................................................................................................................6
Special Trading Fund v. Botempo, No. 13-cv-1401 (W.D. Pa. Oct. 6, 2013) .................................5
Superior Partners v. Chang, 471 F. Supp. 2d 750 (S.D. Tex. 2007) .............................................14
Tanzer v. Turbodyne Corp., 68 A.D.2d 614 (1st Dep’t 1979) .......................................................10
United for Peace & Justice v. Bloomberg, 5 Misc. 3d 845 (Sup. Ct. N.Y. Cnty. 2004) ...............14
Wehringer v. Brannigan, 232 A.D.2d 206 (1st Dep’t 1996) .........................................................22
Statutes & Rules
C.P.L.R. § 901(a)(4) ......................................................................................................................22
C.P.L.R. 908...................................................................................................................................23
C.P.L.R. 909...................................................................................................................................23
C.P.L.R. 3118...........................................................................................................................2, 7, 8
Article 9 of the Civil Practice Law and Rules ...............................................................................22
General Business Law § 130....................................................................................................7, 8, 9
Other Authorities
Cornerstone Research, Recent Developments in Shareholder Litigation Involving
Mergers and Acquisitions, at 3, available at
http://www.cornerstone.com/files/upload/shareholder_MandA_Litigation-pdf.aspx.) ...........11
Leo Strine Jr., et al., Putting Stockholders First, Not the First-Filed Complaint, 69 Bus.
Law. 1, 17 (2013) .....................................................................................................................21
iii
At the Court’s request, this paper addresses a brand of shareholder litigation that
involves a nebulous web of plaintiff entities that hold just a few shares in each of an untold
number of public companies and that exist solely to bring strike suits. In recent years, the
Brualdi Law Firm, counsel to Plaintiff here, has brought more than a dozen cases in New York
Supreme Court on behalf of these purported “partnerships” that lack any official records of their
existence and whose only business is enriching the Brualdi Law Firm at the expense of the public
companies he sues and their shareholders. These “partnerships” are, at least as far as public
records reveal, all traceable back to the same individual—a fact the Brualdi Law Firm tries to
obscure.
Here, like in many other cases he has brought, the Brualdi Law Firm timed his
suit to exercise maximum settlement pressure rather than to advance the interests of the class of
shareholders he purports to represent. The Brualdi Law Firm prepared his complaint based on
the preliminary proxy regarding Martin Marietta Materials, Inc.’s (then-proposed) merger with
Texas Industries, Inc. (the “Transaction”), which was publicly filed with the SEC on March 3,
2014. This is clear because the complaint quoted a disclosure made in the preliminary proxy,
instead of the slightly revised version of the same disclosure in the definitive proxy. (See infra
n.15.) But the Brualdi Law Firm deliberately waited to bring his meritless disclosure claims
until the filing of the definitive proxy, nearly three months after the filing of the preliminary
proxy and just 31 days before the scheduled vote on the Transaction. This shows that the Brualdi
Law Firm acted in its own interest, to try to avoid scrutiny of itself and its client and to further a
settlement and the payment of fees, rather than to maximize the likelihood that additional useful
information would be disclosed to Martin Marietta shareholders.
When they became aware of this suit, Defendants—Martin Marietta Materials,
Inc. (“Martin Marietta”) and its board of directors and Texas Industries, Inc. (“TXI”)—
immediately raised concerns to Mr. Brualdi about the plaintiff “City Trading Fund” and the
claims in the complaint. As discussed more fully below, Mr. Brualdi initially refused to provide
any additional information about “City Trading Fund” or its interest in maintaining this lawsuit.
It took sustained effort by Defendants—including a letter, a request under C.P.L.R. 3118, and a
request for an Order to Show Cause why Plaintiff Should Not Be Prohibited From Maintaining
This Action (“Defendants’ OTSC”)—for the Brualdi Law Firm to provide even the most basic
identifying information about its client. It was not until the day Defendants’ opposition to
Plaintiff’s Order to Show Cause for expedited discovery and a preliminary injunction
(“Plaintiff’s OTSC”) was due that Mr. Brualdi finally disclosed the names of the two purported
“partners” of City Trading Fund. One of these individuals—Lawrence Bass—was the individual
behind all other “partnerships” on whose behalf the Brualdi Law Firm has brought suit in recent
years for which the identity of the “partners” has been revealed.
Unlike other merger litigation, which can sometimes reveal to investors legitimate
problems with the merger or the disclosures, this “Brualdi Brand” litigation is expressly intended
solely to capitalize on the pressures to settle faced by transacting parties. An injunction delaying
the shareholder vote would have imposed enormous costs and substantial risks on Martin
Marietta, TXI and their employees and shareholders, as explained further below. Indeed, even a
delay in the Court’s decision would have created damaging uncertainty. Those costs and risks,
plus the costs of defending against a preliminary injunction motion and (even if denied) any
subsequent proceedings, routinely dwarf the expected costs of settlement. So too here:
Defendants agreed to settle at 3:00 a.m. on the day of the scheduled order to show cause hearing.
The Memorandum of Understanding (“MOU”) the parties ultimately executed (Appendix A)
contemplates that Defendants would make certain disclosures (which were made in Form 8-Ks
(Appendix B) later that day); that the parties would exchange mutual releases of certain claims;
2
and that Defendants would pay attorneys’ fees of up to $500,000 to the Brualdi Law Firm,
subject to approval by this Court. While the MOU requires Defendants to “attempt in good faith
to agree . . . to an appropriate stipulation of settlement” (MOU ¶ 4), the MOU makes clear that
Defendants maintain the defenses and positions they took during litigation and are settling the
action “solely to eliminate the risk, burden, and expense of further litigation” (id.).
Following execution of the MOU, the Court raised concerns about this litigation
and explained that it wanted to understand Defendants’ position with respect to this action, why
Defendants settled, and the policy implications thereof. Accordingly, this paper will discuss the
issues raised when Brualdi Brand litigation is brought. In particular, the paper will identify the
problems posed by meritless, eleventh-hour claims brought on behalf of plaintiff entities whose
sole purpose is to extract attorneys’ fees. (Infra Part I.) This paper will explain the reasons
behind Defendants’ agreement to settle and the costs of Brualdi Brand litigation to defendant
companies and their shareholders. (Infra Part II.) Finally, this paper will discuss the Court’s
role in supervising the settlement of class actions and its role in protecting against the abusive
tactics of Brualdi Brand litigation. (Infra Part III.)
I.
POLICY IMPLICATIONS OF THE “BRUALDI BRAND” OF LITIGATION
Brualdi Brand litigation is pernicious in two important respects. First, permitting
Mr. Brualdi’s clients—fictitious entities with no purpose for existing and no economic interests
apart from the generation of attorneys’ fees—to act on behalf of classes of other, real investors
with actual money staked on the financial health of public companies poses a stark conflict of
interest. Second, that fundamental conflict causes the Brualdi Law Firm to adopt inequitable
litigation tactics and to advance meritless claims directed not at vindicating the rights of real
shareholders but at maximizing the chance Brualdi Brand litigation will settle, resulting in
awards of attorneys’ fees that are wholly out of proportion to any real benefit conferred on
3
shareholders. Making this conflict even worse is the fact that ultimately, the shareholders
themselves are (through their ownership of the companies Mr. Brualdi sues) responsible for
paying fees awarded to Mr. Brualdi. Allowing the Brualdi Law Firm’s tactics to succeed wastes
judicial resources, undermines the public’s faith and confidence in the courts of this State and
impairs the State’s reputation as a fair, welcoming place for companies to do business.
A.
The Brualdi Entities Exist Only to Enrich the Brualdi Law Firm.
There can be no serious dispute that City Trading Fund exists solely for the
purpose of enabling the Brualdi Law Firm to bring shareholder strike suits. As Defendants
showed in their earlier memoranda in this case (Defs.’ OTSC Br. at 6-7; Defs.’ Opp’n to Pl.’s
OTSC at 16-18), City Trading Fund is just the latest in a long line of partnerships that exist for
that purpose. The Brualdi Law Firm’s stable of partnerships (the “Brualdi Entities”) have no real
investors or independent economic interests, apart from the generation of attorneys’ fees for the
Brualdi Law Firm. Their only holdings are comparatively miniscule investments—here, only 10
shares of Martin Marietta (Defs.’ OTSC Br., Ex. D.1)—in each of an untold number of public
companies, purchased only to allow them to bring shareholder suits against those companies
(rather than for any economic purpose unrelated to litigation). The interests of the Brualdi
Entities therefore diverge wildly from the interests of investors with money actually staked on
the success of Martin Marietta and the other public companies the Brualdi Law Firm has sued.
While real investors hope that the companies they own deliver maximum value, and may choose
to seek remedies in court for corporate misfeasance that poses a threat to that value, the Brualdi
Entities do not care about the financial success of the companies they sue.
1
“Defs.’ OTSC Br., Ex __” herein refers to an Exhibit to the Affirmation Of Sandra C.
Goldstein in Support of Defendants’ OTSC, filed on June 16, 2014.
4
In an attempt to avoid this Court’s scrutiny of City Trading Fund and the other
Brualdi Entities, the Brualdi Law Firm belatedly added two named plaintiffs—the purported
partners of City Trading Fund—to this case. (Appendix C, June 17, 2014 Email from R. Brualdi
to S. Goldstein, with Statements of Address from Mr. Bass and Mr. Carullo; see also Defs.’
Opp’n to Pl.’s OTSC at 17-18.) Putting aside the fact that neither of these individuals is alleged
to own Martin Marietta stock, and thus lacks standing to serve as a plaintiff in this action, the
Brualdi Law Firm’s amendment only heightened Defendants’ concerns about the legitimacy of
City Trading Fund: one of the individuals—Lawrence Bass—is an attorney who has been
involved in every other shareholder suit brought by the Brualdi Law Firm in New York for which
the identity of the partners is available. (Defs.’ Opp’n to Pl.’s OTSC, Exs. 2-5;2 see also Defs.’
Opp’n to Pl.’s OTSC, Exs. 6-15 (non-New York cases involving Messrs. Brualdi and Bass).)
Mr. Brualdi has a history of obscuring the person or persons with interests in the fictitious
entities for which he brings suit, revealing partial information about them only when required to
do so, or when he believes it may result in a strategic advantage.3
2
“Defs.’ Opp’n to Pl.’s OTSC, Ex _” herein refers to an Exhibit to in the Affirmation of
Rory A. Leraris in Support of Defendants’ Joint Opposition to Plaintiff's Motion For (1) A
Preliminary Injunction Pending Expedited Discovery, (2) Expedited Discovery, and (3) A
Hearing Date for a Postexpedited Discovery Motion to Continue the Preliminary Injunction
Pending Trial, filed on June 17, 2014).
3
As discussed in Defendants’ previous memoranda (Defs.’ OTSC Br. at 10-11; Defs.’
Opp’n to Pl.’s OTSC at 18-19, Exs. 33-37), Mr. Brualdi’s tactics have already proved
problematic in courts in Delaware (In re SS & C Techs., Inc. S’holders Litig., 948 A.2d 1140
(Del. Ch. 2008)); the Western District of Pennsylvania (Special Trading Fund v. Botempo, No.
13-cv-1401 (W.D. Pa. Oct. 6, 2013)); and Ohio (Cashstream Fund v. Huston, No. 14-cv-37
(Ohio Ct. of Common Pleas Feb. 18, 2014)). Indeed, the New York Supreme Court recently
dismissed on forum non conveniens grounds a Brualdi case where the plaintiff failed to show
“the extent of its interest” in New York. Sector Grid Trading Co. v. Ford, Defs.’ Opp’n to Pl.’s
OTSC, Ex. 32, Tr. at 9-10, No. 650121/2013 (Sup. Ct. N.Y. Cnty. Feb. 15, 2013).
5
The Brualdi Law Firm’s clients have already been recognized for what they are—
professional plaintiffs. In 2008, the Delaware Chancery Court found that Mr. Brualdi had made
a cottage industry of bringing shareholder lawsuits on behalf of entities that do not appear to
conduct any activity other than litigation. SS & C Techs., Inc. S’holders Litig., 948 A.2d 1140,
1145 (Del. Ch. 2008). These “partnerships” shared a defining characteristic: they accumulated a
“miniscule, indirect interest in several hundred publicly traded companies” but then spawned “an
unusually large number of stockholder lawsuits”. Id. at 1144-45.
In the aftermath of the Delaware Court of Chancery’s decision, which sanctioned
Mr. Brualdi and his client for making misrepresentations designed to obscure those facts (id. at
1141), Mr. Brualdi has changed his choice of judicial forum and his go-to plaintiff, but not his
tactics. As Defendants pointed out in their order to show cause papers, the Brualdi Law Firm has
brought suits on behalf of at least 12 other similarly and generically named partnerships in
Supreme Court just since 2009 (when records began being stored on NYSCEF): “Broadbased
Equities”, “Broadbased Fund”, “Broadway Capital”, “Equity Trading”, “Gotham Investors”,
“New World Investors”, “Rational Strategies Fund”, “Realistic Partners”, “Reliant Equities”,
“RSD Capital”, “Sector Grid Trading Company” and “Special Trading Fund”. (Defs.’ OTSC Br.
at 1-2, 6-7; Defs.’ OTSC, Ex. A, NYSCEF list of The Brualdi Law Firm cases.) And early last
month, less than two weeks after the parties settled this action, a 13th entity joined this lineup
when the Brualdi Law Firm filed suit on behalf of “Cashstream Fund” in the Supreme Court for
the County of Suffolk. Cashstream Fund v. Lamb, No. 065134/2014 (Sup. Ct. Suffolk Cnty. Jul.
3, 2014).
Because of the Brualdi Law Firm’s history, Defendants attempted to learn more
about the Brualdi Law Firm’s clients using publicly available resources and through the limited
procedural devices that were available in the short time allotted for opposing the Brualdi Law
6
Firm’s motion for a preliminary injunction. Defendants pointed out that General Business Law
§ 130 prohibits a general partnership that conducts business in New York from maintaining a
lawsuit unless it has filed a certificate identifying its partners, and that Defendants believed that
neither City Trading Fund nor any other partnership on whose behalf the Brualdi Law Firm had
sued had complied. (Defs.’ OTSC Br. at 12-15; Defs.’ Opp’n to Pl.’s OTSC at 19-20.) The
Brualdi Law Firm did not contest these facts but instead asserted that he did not think City
Trading Fund did business within New York “or anywhere”. (Defs.’ Opp’n to Pl.’s OTSC, Ex.
19, June 11, 2014 Email from S. Goldstein to R. Brualdi.) But City Trading Fund alleged that it
had received Martin Marietta’s prospectus in this State, and if it truly were a legitimate
investment fund with operations in this State, it should have complied with § 130. After
unsuccessfully requesting that Mr. Brualdi provide information voluntarily, Defendants served a
request under C.P.L.R. 3118, which requires a party to identify within 10 days its address and
that of its officers or members. (Defs.’ OTSC Br., Ex. Q.) Defendants also requested that Mr.
Brualdi explain the purpose and function of the entity on whose behalf he sued. (Defs.’ OTSC
Br., Ex. I (June 11, 2014 Email from S. Goldstein to R. Brualdi).)
The Brualdi Law Firm’s refusal to provide even basic information about his
clients is particularly offensive in light of his strategic disclosure of information about them
when he feels it will advance his litigation goals. For example, the Brualdi Law Firm has
identified the “partners” of his plaintiff entities when necessary to defeat a motion to dismiss for
lack of personal jurisdiction,4 or to defeat a motion to dismiss for forum non conveniens,5 or to
4
Defs.’ Opp’n to Pl.’s OTSC, Ex. 2, Affidavit submitted in support of Plaintiff’s
Memorandum of Law in Opposition to Defendants’ Motions to Dismiss the Complaint,
Broadway Capital v. Benton, et al, Index No. 650143/2013 (Sup. Ct. N.Y. Cnty. Feb. 6, 2013).
5
Defs.’ Opp’n to Pl.’s OTSC, Ex. 4, Affidavit submitted in support of Plaintiff’s
Memorandum of Law in Opposition to Defendants’ Motion to Dismiss Based on Forum Non
7
support a motion to remand a case from federal court to state.6 And in this case, Mr. Brualdi
initially asserted that one of the partners of City Trading Fund was a citizen of Texas because he
believed it precluded Defendants from removing to federal court based on federal diversity
jurisdiction (Defendant TXI being a citizen of Texas), even while remaining steadfast in his
refusal to provide any other information about City Trading Fund’s partners. (Defs.’ OTSC Br.,
Ex. F.)
In fact, Mr. Brualdi identified the partners of City Trading Fund only after
Defendants filed their OTSC to prohibit City Trading Fund from maintaining this action based
on General Business Law § 130 and this Court’s inherent powers (and after the ten-day deadline
for responding to Defendants’ C.P.L.R. 3118 request had expired, and only hours before
Defendants’ Opposition to Plaintiff’s OTSC was due). (Appendix C.) As Defendants pointed
out in their Opposition to Plaintiff’s OTSC, the formation and use of these fictitious partnerships
were designed to conceal the true identities of the persons who were responsible for instituting
and superintending these cases—Mr. Bass and Mr. Brualdi.7 (Defs.’ Opp’n to Pl.’s OTSC at 1619.) In this case, that concealment included heavy redactions on E*Trade statements Mr. Brualdi
provided as proof of City Trading Fund’s holdings in Martin Marietta, including redactions of
City Trading Fund’s own mailing address. (Defs.’ OTSC Br., Ex. D.)
Conveniens and for Lack of Personal Jurisdiction, Sector Grid Trading v. Ford, et al, Index No.
650121/2013 (Sup. Ct. N.Y. Cnty. Jan. 31, 2013).
6
Defs.’ Opp’n to Pl.’s OTSC, Ex. 3, Affidavit submitted in support of plaintiff’s motion for
an order remanding case to New York Supreme Court, Equity Trading v. Ginsburg, No. 14-cv00499-RWS (S.D.N.Y. Feb. 25, 2014).
7
As the Delaware Chancery Court found, Mr. Brualdi had made misstatements concerning
his clients that were “easily susceptible to the inference that they were made to conceal the
existence and nature of this web of partnerships and their evident litigation spawning purpose”.
SS &C Techs., 948 A.2d at 1145.
8
Mr. Brualdi’s eventual, unavoidable disclosure of Lawrence Bass as one of the
two purported principals of City Trading Fund is only more evidence that City Trading Fund
exists only to earn the Brualdi Law Firm fees. Mr. Bass was involved in every other shareholder
suit brought by the Brualdi Law Firm in New York for which the identity of the underlying
“partners” was made public: he has admitted to being a partner of Broadway Capital, Equity
Trading, Realistic Partners, Sector Grid Trading and Special Trading Fund. (Defs.’ Opp’n to
Pl.’s OTSC, Exs. 2-5.) Mr. Bass was also involved in at least five other merger-related suits in
other jurisdictions, and was always represented by the Brualdi Law Firm. (Id., Exs. 6-15.) Thus,
the assertion that City Trading Fund is not a professional plaintiff because it “has filed but one
case” (Pl.’s Opp’n to Defs.’ OTSC at 5.) is extremely misleading, to say the least. The use of
“City Trading Fund” as the named plaintiff (and the other comparably named Brualdi Entities in
other actions) only makes the Brualdi Law Firm’s actions worse, as it only serves to obscure the
real interested parties—Mr. Bass and the Brualdi Law Firm.8
Mr. Brualdi did not offer an explanation for why Mr. Bass—a New York-licensed
attorney who apparently earns a living as an accountant9—is a principal in so many partnerships
that each own miniscule investments in a variety of public companies, and that generate so many
8
The Brualdi Law Firm even attempted to file a certificate in compliance with § 130 only to
have it rejected by the Clerk of New York County, then informed this Court that the Queens
County Clerk stated that she would have accepted it (Plaintiff’s Opposition to Defendants’
Application For OTSC, filed June 19, 2014 (hereinafter “Pl.’s Opp’n to Defs.’ OTSC”), at 19-20
& n.20; Affidavit of Richard B. Brualdi, Esq. in support of Pl.’s Opp’n to Defs.’ OTSC, Ex. 9),
without disclosing to this Court or the Defendants that Mr. Brualdi and that Clerk appear to be
personal friends who own adjacent beach homes. See City-Data.com, “Property Valuation of
Shore Front Parkway, Queens, NY”, available at http://www.city-data.com/nyproperties/assessments/Queens/S/Shore-Front-Parkway-12.html#ixzz356DunYep (showing that
Mr. Brualdi owns 96-10 Shore Front Parkway #9B, and Ms. Pheffer owns #9D) (Appendix D).
9
See Citrin Cooperman, “Lawrence Bass, CPA, J.D.,” available at
http://www.citrincooperman.com/people/people-detail.aspx?id=0&fn=Lawrence&ln=Bass
(Appendix E).
9
shareholder suits brought by Mr. Brualdi. Nor did Mr. Brualdi ever present any records of the
formation or existence of those partnerships (apart from those heavily-redacted E*Trade
statements). There is also no indication that City Trading Fund’s other “partner”, Mr. Carullo,
became a “partner” before the Transaction was announced or even before the Brualdi Law Firm
and Mr. Bass decided to bring suit. In a fully litigated shareholder case, in which plaintiffs
would be required to move for class certification, the defendants would have the opportunity and
right to probe the circumstances of these partnerships’ existence, including, among other things,
when and by whom the partnerships were formed, and for what purpose. However, the Brualdi
Law Firm is able to avoid such disclosure by working to secure an abbreviated schedule, pushing
for quick settlements, and doing all he can to obstruct discovery of the plaintiff.10
B.
The Claims Brought by the Brualdi Entities Are Meritless Settlement
Generators.
Mr. Brualdi litigates his cases by putting his own interests above the interests of
the classes of shareholders he purports to represent.11 As Defendants explain below, Mr.
10
The Brualdi Law Firm is presumably concerned that courts have, in the past, precluded
plaintiffs and their counsel from maintaining class actions on behalf of legitimate shareholders
when it becomes clear that their purpose is solely to obtain attorneys’ fees. See Tanzer v.
Turbodyne Corp., 68 A.D.2d 614, 621 (1st Dep’t 1979) (reversing class certification to class
representatives who are “closely related to the lawyers for the class; who as a regular practice
make numerous small investments for the purpose of positioning themselves to be able to bring
lawsuits through that law firm; whose investments and interest in the lawsuit as stockholders are
far smaller than even the average of the class they seek to represent and are substantially
outweighed by the possibility of benefit to the law firm to which they are so closely related”);
see also In re SS & C Techs., Inc. S’holders Litig., 911 A.2d 816, 817-18 (Del. Ch. 2006)
(refusing to approve a disclosure-only settlement in a merger suit brought by Mr. Brualdi where
underlying claims were not diligently investigated or pursued by the plaintiff’s counsel and
“where the only continuing interest is that of the plaintiffs’ counsel in recovering a fee”).
11
The Delaware Chancery Court found in Continuum Capital that Mr. Brualdi “made a selfinterested decision . . . rather than one that was made in the best interests of the class”. (Defs.’
OTSC Br., Ex. J, Continuum Capital v. Nolan, No. 5687-VCL, Tr. at 12-13 (Del. Ch. Feb. 15,
2011).) In that case, Mr. Brualdi’s chose to file suit in Virginia, where the defendant corporation
was based but which does not have class action procedures and which, the court found, had
10
Brualdi’s interests cause him to file meritless disclosure claims at the last possible moment
before consummation of a merger—in this case, almost three months after Defendants filed a
preliminary proxy containing all information that was material to the transaction and only a few
weeks before shareholders were scheduled to vote on it. The Brualdi Law Firm uses this delay to
avoid scrutiny of his claims and clients, even though the delay can also result in diminished
opportunity for the company’s shareholders to receive and consider any of the information Mr.
Brualdi contends is material.12 In exchange for this purported benefit conferred on the
shareholders, those same shareholders either must bear the risk that a transaction-barring
injunction will be issued, causing devastating financial harm, or incur the substantial costs of
settling the litigation, not the least of which is the Brualdi Law Firm’s fees.
1.
Plaintiff’s unjustifiable delay belies its claim to represent the interests
of shareholders.
Plaintiff’s claim that the Complaint was timely brought after the Defendants filed
the final proxy with the SEC (Pl.’s OTSC Br. at 1) misrepresents the ordinary course of
distinctly board-friendly corporate governance laws. Id. at 6-10. The court suspected that
Mr. Brualdi made this choice to avoid Delaware, where he had previously been criticized for his
conduct in SS &C Technologies. Id. at 11. The court reduced Mr. Brualdi’s fees in part because
of his “strange” choice of forum, which led to needless and costly procedural issues. Id. at 1013.
12
Delaying also offers Mr. Brualdi the advantage of allowing him to avoid bringing lawsuits
where other plaintiffs’ firms have already brought suit. (For acquisitions valued at over $100
million, an average of 5.1 lawsuits are filed. Cornerstone Research, Recent Developments in
Shareholder Litigation Involving Mergers and Acquisitions, at 3, available at
http://www.cornerstone.com/files/upload/shareholder_MandA_Litigation-pdf.aspx.) By being
the only plaintiff challenging a transaction, Mr. Brualdi ensures that he will not become
enmeshed in a dispute over a leadership structure that would threaten to expose the issues
surrounding him and his clients. In some cases, including here, this means Mr. Brualdi bizarrely
brings suit on behalf of shareholders of a buyer rather than a seller (bringing suit on behalf of the
seller is much more customary in merger litigation). See, e.g., Rational Strategies Fund v. Hill,
No. 651625/2013 (N.Y. Sup. Ct. 2013); Realistic Partners v. Schorsch, No. 654468/2013 (N.Y.
Sup. Ct. 2013).
11
shareholder litigation, as well as the Brualdi Law Firm’s own actions in this case. Plaintiff
deliberately waited to bring its claims and seek expedited and injunctive relief until the last
minute, even though the materials on which the claims are based were publicly available months
earlier. This is not the way litigation brought by shareholders with a real economic interest in the
merger and the company should and does typically proceed.13
There generally is little difference between the disclosures in a preliminary proxy
and those in a definitive proxy. Accordingly, disclosure claims are typically filed shortly after
the preliminary proxy is filed.14 Plaintiffs who follow this protocol, unlike the Brualdi Law
Firm, do so in an effort to increase the likelihood that disclosures that they believe to be
insufficient can be amended in the definitive proxy—which is the version of the proxy that is
mailed to shareholders of record—such that if plaintiffs are correct, they maximize the ability of
shareholders to vote on a fully informed basis.
The Brualdi Law Firm took a different approach here, waiting to file the
complaint until the day Defendants’ definitive proxy was filed while disingenuously claiming
that he had “moved expeditiously”. (Pl.’s OTSC Br. at 1.) The Brualdi Law Firm waited even
though the challenged disclosures in the definitive proxy were almost identical to those in the
preliminary proxy. And he waited despite clearly relying on the preliminary proxy to develop
13
For example, a TXI shareholder brought suit in Texas federal court shortly after the
merger was announced, claiming, among other things, that the seller’s process leading up to the
Transaction was flawed. Phillips v. Texas Industries, Inc., No. 14-cv-00740 (N.D. Tex. Feb. 25,
2014). Defendants view that litigation and others like it as fundamentally different than the
Brualdi Brand litigation discussed herein. Without conceding that any of the Phillips claims had
any merit, Defendants recognize that at least the plaintiff was an individual with an actual
economic stake in the selling company and the Transaction.
14
For instance, virtually every shareholder case cited in both Plaintiff’s and Defendants’
Briefs (except those cases brought by Mr. Brualdi) involved challenges to a preliminary proxy.
(See also Defs.’ Opp’n to Pl.’s OTSC at 15-16.)
12
his disclosure claims—an obvious fact because the Complaint quoted a disclosure made in the
preliminary proxy instead of the slightly revised version of that same disclosure in the definitive
proxy.15 With respect to all other allegations, there is no difference whatsoever between the
disclosures in the preliminary proxy and the disclosures in the definitive proxy.16
Mr. Brualdi argued that if he had filed the complaint based on the preliminary
proxy, Defendants could have removed the case to federal court. (Pl.’s Opp’n to Defs.’ OTSC at
3-4.) Merger-related disclosure litigation brought based on the preliminary proxy routinely
proceeds in state court, not federal court, contrary to Mr. Brualdi’s assertion. Further, even if
Mr. Brualdi were right on the law,17 if Plaintiff and its counsel actually represented the interests
of other Martin Marietta shareholders, they would be more concerned with bringing disclosure
claims timely than with forum-shopping.
15
The complaint states that ‘according to the Proxy Statement, the Martin Marietta and TXI
Street Cases were “based upon publicly available Wall Street research analyst estimates”.
(Compl. at 11; see also Am. Compl. at 11.) That is the exact language used in the preliminary
proxy (Appendix F, Excerpt of Martin Marietta Preliminary Proxy, at 55); however, the
definitive proxy states that the Street Cases were “based upon publicly available estimates from
The Institutional Brokers’ Estimate System (I/B/E/S)” (Defs.’ OTSC Br, Ex. E (Proxy) at 58; see
also Defs.’ Opp’n to Pl.’s OTSC at 15-16.)
16
Apart from the addition of two named plaintiffs, the Amended Complaint filed by Mr.
Brualdi was substantively identical to the original Complaint.
17
The only case Plaintiff cites for this proposition is an outlier. In that case the court held
that the so called “Delaware carve-out”—which exempts from removal to federal court claims
based on the law of the state of incorporation that involve, among other things, a
“communication with respect to the sale of securities of an issuer . . . to holders of equity
securities of the issuer”—does not apply to a preliminary proxy, which is only filed with the
SEC and made available on the Internet, but is not mailed to shareholders. Drulias v. ADE
Corp., C.A. No. 06-11033-PBS, 2006 WL 1766502, at *2 (D. Mass. June 26, 2006). But in
Superior Partners v. Chang, 471 F. Supp. 2d 750 (S.D. Tex. 2007), another case involving Mr.
Brualdi’s firm and one of its “partnership” clients, the court rejected Drulias. See id. at 754-55.
The court there held that preliminary proxies were communications to shareholders because they
are publicly filed and made available on the Internet. Id. at 755. And in Alessi v. Beracha, 244
F. Supp. 2d 354 (D. Del. 2003), the court found that other public communications such as press
releases—which also are not mailed to shareholders—are covered by the carve-out. Id. at 359.
13
Shareholders are best served where all material disclosures are made as
expeditiously as possible and the shareholders proceed with the merger vote on schedule (vote
delays, as discussed further below, are extremely harmful to transacting companies and their
shareholders). Waiting to file disclosure claims and to seek expedited and injunctive relief
serves no one but the plaintiffs and their counsel in seeking to extract attorneys’ fees;
accordingly, courts have routinely recognized unreasonable delays as inequitable behavior. See
e.g., United for Peace & Justice v. Bloomberg, 5 Misc. 3d 845, 849 (Sup. Ct. N.Y. Cnty. 2004)
(“[P]laintiff does not come to court with ‘clean hands,’ because plaintiff is guilty of inexcusable
and inequitable delay”.); Oliver Press Partners, LLC v. Decker, No. 1817-N, 2005 WL 3441364,
at *1 (Del. Ch. Dec. 6, 2005) (rejecting request for expedition, in part, because plaintiffs’ delays
left “an unreasonably short period of time” to resolve the issues); see also Defs.’ Opp’n to Pl.’s
OTSC at 16.
2.
Plaintiff should not have brought his claims in New York.
This action has no legitimate connection to this forum. Typically, merger-related
litigation is filed either in the state of incorporation or the principal place of business of the
corporate defendant. Here, none of the Defendants are domiciled in New York: Martin Marietta
is both incorporated and headquartered in North Carolina; TXI is incorporated in Delaware and
headquartered in Texas; and none of the Director Defendants reside in New York. Neither
Martin Marietta nor TXI maintains offices, let alone headquarters, in New York. And
Mr. Brualdi contends that Plaintiff itself does not transact any business in New York. (Defs.’
OTSC Br., Ex. I (June 11, 2014 Email from S. Goldstein to R. Brualdi).)
When Defendants raised this issue with Mr. Brualdi, he could point only to
tenuous, legally insufficient links to New York, including a forum-selection clause in the merger
agreement that Plaintiff was not entitled to enforce in this action; that Martin Marietta and TXI
14
are traded on the NYSE; that they employ New York counsel; and that they mailed a prospectus
to Plaintiff in New York. (See Defs.’ Opp’n to Pl.’s OTSC at 20 n.11.) Mr. Brualdi’s selfinterested decision wastes precious judicial resources that could otherwise be used for litigation
involving real plaintiffs with real economic stakes in their cases.
3.
Plaintiff’s claims were meritless.
As Defendants’ Opposition to Plaintiff’s OTSC detailed, the disclosures Plaintiff
sought in this case would have provided no material information to shareholders: in each case,
the information either was already public or was merely of the “tell me more” variety that would
not have “significantly altered the total mix of information available to stockholders”.18 Defs.’
Opp’n to Pl.’s OTSC at 15. The Brualdi Law Firm made these meritless claims knowing that,
for the reasons described herein, he likely would be able to force a settlement anyway. This is a
feature of the Brualdi Brand of litigation, making the Brualdi Law Firm’s inequitable litigation
tactics all the more unjustified. The company, and ultimately its shareholders, are forced to bear
the costs associated with the Brualdi Law Firm’s suit. Only the Brualdi Law Firm benefits.
II.
WHY DEFENDANTS HERE SETTLED
Defendants’ agreement to settle—only hours before the preliminary injunction
hearing was scheduled to begin—is best understood in the context of the business realities
associated with a transaction of this size and complexity, and the risks and costs associated with
the litigation the Brualdi Law Firm brought. First, settlement would avoid risks to the
Transaction itself. Second, settlement would avoid Transaction-related costs imposed by any
18
Further, as Defendants explained in their Opposition to Plaintiff’s OTSC (Defs.’ Opp’n to
Pl.’s OTSC at 12-15), Plaintiff’s use of Rational Strategies Fund v. Hill, No. 651625/2013, 977
N.Y.S.2d 669 (table) (N.Y. Sup. Ct. 2013), as the primary support for its arguments was
inappropriate because that decision, which contains very little explanation of its reasoning, deals
with utterly distinguishable disclosures.
15
delay or uncertainty. Third, settlement would avoid costs associated with continuing to litigate
the case. As discussed further below, Defendants took all of these concerns into account when
conducting an analysis of the costs and benefits of settling for additional disclosures and the
possibility of paying several hundred thousand dollars in fees to the Brualdi Law Firm; the
rational conclusion (as Mr. Brualdi well knew would be the case) was to settle.
A.
Risks to the Transaction
Defendants’ fundamental goal throughout the course of this litigation was to
protect the Transaction itself—i.e., to ensure that the shareholder votes went forward as
scheduled and the Transaction closed. Shareholders already had demonstrated that they believed
the Transaction was worthy of such protection—the stock of both companies rose approximately
30% between the time the Transaction was announced and the date of the shareholder votes.19
An injunction (even if temporary) threatened to derail the Transaction.20 In re Delphi Fin. Grp.
S’holder Litig., C.A. No. 7144-VCG, 2012 WL 729232, at *19 (Del. Ch. Mar. 6, 2012)
(observing that one serious risk of issuing an injunction in merger litigation is that “the deal may
be lost forever”); Abbey v. Montedison S.p.A., 143 Misc. 2d 72, 82 (Sup. Ct. N.Y. Cnty. 1989)
(observing that shareholders might misinterpret preliminary measures as “a finding of
wrongdoing on defendants’ part”).
The harm to the companies and their shareholders that would have resulted had
the Transaction been delayed or otherwise disrupted was potentially enormous. First, as
19
This shareholder support was further evidenced by affidavits submitted by two large
shareholders opposing Mr. Brualdi’s efforts to delay or otherwise risk the Transaction. (Defs.’
Opp’n to Pl.’s OTSC, Exs. 29, 30.) Indeed, over 98% of the voting Martin Marietta shareholders
ultimately voted in favor of the merger City Trading Fund sought to enjoin. (Appendix G, June
30, 2014 Martin Marietta Press Release.)
20
Mr. Brualdi capitalizes on the fact that companies recognize that the risk of an injunction
is always present, regardless of how meritless a plaintiffs’ claims might be.
16
discussed further below, the projected synergies of the Transaction were expected to reach $70
million annually. If the Transaction were disrupted, these benefits would be lost. See In re
CheckFree Corp. S’holders Litig., Civ. A. No. 3193-CC, 2007 WL 3262188, at *4 (Del. Ch.
Nov. 1, 2007) (explaining that an injunction “would impose significant costs on the shareholders
. . . in the form of the lost time value of money and lost opportunity costs”). Second, if the
Transaction did not go forward, the stock prices of the companies would likely have fallen back
to where they were before the deal was announced, erasing nearly two billion dollars in
shareholder value. The chance of these potentially catastrophic effects of a disruption to the
Transaction, however remote, motivated Defendants to settle for a comparatively small amount.
B.
Transaction-related Costs Imposed by Delay or Uncertainty
Aside from the risks to the Transaction itself, an injunction and any delay would
have created substantial costs for the companies and their shareholders. Even the uncertainty
arising from a delay pending the Court’s decision would have imposed substantial costs on
Martin Marietta and TXI.
First, Martin Marietta expected to (and did) announce a $700 million bond
issuance the Monday after the scheduled hearing date (Friday, June 20) in this case. (Appendix
H, June 23, 2014 Press Release.) The purpose of the issuance was to refinance TXI’s
outstanding debt. An injunction would have resulted in prominent disclosure in the offering
memorandum, which would have either impaired the ability to launch the offering at all or, if
launched, significantly impaired pricing of the bonds. And even if the Court had simply deferred
consideration on Plaintiff’s OTSC that Friday, the bonds—and thus the Transaction itself—likely
would have become more expensive. By avoiding any uncertainty or injunction, Martin Marietta
was able to complete the refinancing by the closing date (July 1, 2014) and reduce the interest
rate owed on the bonds by over half—providing immediate saving to all shareholders.
17
Second, a delayed closing would have postponed the ability of the parties and
their shareholders to begin realizing synergies and other benefits of the Transaction. See H.F.
Ahmanson & Co. v. Great W. Fin. Corp., Civ. A. No. 15650, 1997 WL 305824, at *12 (Del. Ch.
June 3, 1997). As detailed in Martin Marietta’s shareholder presentation given when the
Transaction was announced, these benefits included selling, general and administrative
(“SG&A”) savings of approximately $34 million annually, plus operational synergies of
approximately $36 million annually. (Defs.’ Opp’n to Pl.’s OTSC, Ex. 26 at 22.) The threat to
these savings posed by a delayed closing was heightened because most of the companies’ sales
occur during warm-weather months—meaning that a slight delay of the closing during summer
or into the fall would have been particularly harmful.
Third, a delayed shareholder vote would have mooted the substantial resources
already invested in preparing and distributing materials for the scheduled vote. See Minzer v.
Keegan, No. CV-97-4077 (CPS), 1997 WL 34842191, at *13 (E.D.N.Y. Sept. 22, 1997); Dennis
v. Buffalo Fine Arts Acad., 836 N.Y.S.2d 498 (Table), at *6 (Sup. Ct. Erie Cnty. 2007). Making
arrangements for a vote at a later date, and notifying shareholders of such a rescheduling, is
expensive and logistically difficult.
Fourth, a delay of any kind would have created additional uncertainty amongst
the companies’ employees and customers, further disrupting their businesses. See In re Dollar
Thrifty S’holder Litig., 14 A.3d 573, 618 (Del. Ch. 2010); Minzer, 1997 WL 34842191, at *13.
Employees who were scheduled to transition on a particular date would have been unclear about
their job responsibilities and their future employment had the vote or the closing been delayed.
Customers also would have questioned the ability of the companies to service their needs if the
Transaction had been postponed.
Fifth, a delay would have added significantly to Martin Marietta’s integration
18
costs. The Transaction involved (and continues to involve) a complex set of thousands of
interlinking steps. The timing of these steps is pegged to various milestones relating to the
Transaction—e.g., one week prior to close, one day prior to close, at close, first quarter after
close, etc. Nearly every step is dependent on completion of other steps, often by separate teams
at Martin Marietta. A delay or disruption in any one of these steps would have set off a chain
reaction with costly consequences. For example:
•
Information technology integration: This involved ensuring basic
connectivity with TXI, creating linkages with TXI’s systems to allow for
financial reporting consolidation, addressing potential change of control
provisions or other impacts to critical IT contracts, and implementing
appropriate user provisioning upon close to ensure access continuity,
functionality and security.
•
Human resources integration: This required a number of steps, including
securing commitments from employees, migrating the payroll system at
TXI, addressing impacts to benefits plans and pension plans,
communicating benefits changes to employees, reaching agreements with
labor unions and other collective bargaining units, and managing health
care conversions to ensure there were no lapses in coverage. Health care
insurance carrier conversions in particular always impose additional
complications in the merger context: delays that impact the target closing
date can cause both the old and the new insurer to refuse coverage on the
basis of a mistaken position that the other carrier’s coverage applies.21
•
Sales and marketing integration: This required, among other things,
preparing sales teams for the transition, ensuring open customer orders at
TXI were transferred, and obtaining customer consents for large contracts
with change of control clauses. A delay in closing would have required
significant communication with customers to clarify the status of their
orders and contracts and allay any concerns they had regarding perceived
instability. It also would have required educating the sales and marketing
teams regarding the changes resulting from the delay.
21
In the case of one smaller acquisition Martin Marietta completed in the past affecting only
50 employees, Martin Marietta’s vice president of human resources was called in the middle of
the night due to confusion over a new employee’s health care coverage for his child. The vice
president was forced to put the employee’s urgent care bill on his credit card so that the child
could be treated. In a deal like the Transaction involving approximately 2,000 employees across
multiple states, this type of confusion can have devastating consequences.
19
•
Regulatory matters: Martin Marietta had to obtain licenses to operate in
certain circumstances, and the companies had to obtain antitrust clearance
from relevant agencies and take actions required by those agencies as
conditions to approval. Many of these requirements were timed based on
closing of the deal. Disruption of the closing date could have put licenses
and approvals at risk or jeopardized the company’s compliance with
regulatory conditions on those approvals.
•
Finance, accounting and tax integration: Martin Marietta’s integration
plan involved a task list of over 800 discrete finance-related items. These
included mapping of accounts, ensuring proper internal controls were in
place to report as a joint entity, managing financing arrangements,
including addressing potential triggers to debt covenants, harmonizing
accounting reporting standards, handling necessary SEC and New York
Stock Exchange reporting, and aligning risk management/hedging
policies. Execution of these tasks was heavily dependent on known
deadlines and coordination across hundreds of people, and was
specifically timed to coincide with closing and various closing-related
milestones (e.g., close of business on the day prior to closing).
Sixth, a delayed shareholder vote would have necessarily led to a delayed closing,
thus depriving Martin Marietta of the practical advantages of closing the Transaction at the start
of the new fiscal quarter (July 1, 2014). See Minzer, 1997 WL 34842191, at *13. These
advantages include reduced employee benefit and accounting costs.
C.
Litigation Costs
Defendants’ expenses associated with litigating the case at and after the
preliminary injunction hearing may well have been significant. Had litigation continued beyond
the hearing, it could have cost Martin Marietta shareholders hundreds of thousands, if not
millions, more dollars (above and beyond the significant costs that had already been incurred,
including briefing Plaintiff’s and Defendants’ OTSCs and preparing for the hearing).
Defendants here took these costs into account when weighing their options. While many such
costs already had been incurred, Defendants were cognizant of the ongoing costs of litigating the
case and the possibility that they would have exceeded the costs of settling with Mr. Brualdi.
*
*
20
*
The risks to the transaction, the costs of delay, and the costs of litigation all
pointed the Defendants towards settlement, even in the face of a fundamentally flawed case.
Agreeing to make incremental disclosures and potentially pay the Brualdi Brand attorneys’ fees
(subject to the approval of the Court) to make risks and costs such as those described above go
away completely is a rational business decision for a defendant company because the alternative
is untenable. See Leo Strine, Jr., et al., Putting Stockholders First, Not the First-Filed
Complaint, 69 Bus. Law. 1, 16 (2013) (observing that “if the defendants believe that the
transaction is good for stockholders, as they should if they are directors recommending the
transaction, then settling cases that are an obstacle to the transaction in a cost-effective way is a
proper fiduciary act”). The Brualdi Law Firm fully understands this dynamic, and counts on it in
every merger lawsuit he brings. There is no serious incentive for the Brualdi Law Firm to ensure
his complaint makes legitimate claims and is brought in a timely manner, in the right forum;
rational companies will often choose to settle with him rather than risk an injunction or a delay
of any kind in multi-million or multi-billion dollar transactions.
III.
THE COURT’S ROLE IN SETTLEMENTS
Because of the possibility that the interests of a named plaintiff and its attorney
will conflict with the interests of unnamed class members who are not present before the court,
New York law requires significant judicial oversight of settlements in class actions. Without
such oversight, the risk is too great that the named plaintiff and its counsel will seek to enrich
themselves at the expense of absent class members, especially by seeking attorneys’ fees that are
unwarranted and unreasonable in light of the benefits actually secured for the class.
This judicial scrutiny also protects the New York courts from being abused by
lawyers seeking to enrich themselves at the expense of the class members they purport to
represent. Allowing such attorneys to succeed would cause great damage to the public’s faith
21
and confidence in this State’s legal system, and would also waste scarce judicial time and
resources that should be allocated to more real and significant matters affecting the public
interests.22 To this end, Article 9 of the Civil Practice Law and Rules prescribes mandatory
procedures for the approval of a settlement in a class action.
First, the Court must conclude that a preliminary class should be certified,
including by making a finding that the class representative “will fairly and adequately protect the
interests of the class”. C.P.L.R. § 901(a)(4). Even when a class is certified “for settlement
purposes only, these prerequisites [to class certification]—and particularly those designed to
protect absentee class members—must still be met and, indeed, demand undiluted, even
heightened, attention.” Klein v. Robert’s American Gourmet Food, Inc., 28 A.D.3d 63, 69 (2d
Dep’t 2006) (citation and quotation omitted). The need for scrutiny is heightened in a settlement
because of the risk that, to maximize his attorney’s fees, the class representative’s counsel will
bargain away or otherwise sacrifice the interests of the absent class members.
Second, if preliminary certification is warranted, notice of the case and the
proposed settlement must be delivered to the absent members of the class. C.P.L.R. 908. That
notice often comes at substantial expense to the settling defendant;23 depending on the form of
the notice and the number of shareholders to whom it must be sent, the cost can range from tens
of thousands to hundreds of thousands of dollars. Notice is required to inform the absent class
22
The Court also has inherent powers to ensure the legitimacy and integrity of its own
proceedings. Wehringer v. Brannigan, 232 A.D.2d 206, 207 (1st Dep’t 1996) (“[U]nder the
inherent powers doctrine, this Court is vested with all powers reasonably required to enable it to
‘perform efficiently its judicial functions, to protect its dignity, independence and integrity, and
to make its lawful actions effective. . . .’”) (citation omitted).
23
This cost is in addition to the costs of preparing and negotiating definitive settlement
documentation, which, along with subsequent settlement-related hearings, can exceed tens of
thousands of dollars.
22
members of the settlement’s impact on their rights and their right to object to the settlement or
otherwise participate in the case. However, notice does not obviate the need for review by the
Court—Brualdi Brand litigation can shift even more costs to shareholders in the settlement
context where company defendants are required to pay additional attorneys’ fees for any
successful objectors.
Third, the Court must analyze the terms of the settlement to ensure that the
settlement is “fair, reasonable and adequate” to the members of the class. Klein, 28 A.D.3d at
69; see also C.P.L.R. 908. Such scrutiny is particularly important in shareholder litigation, in
which it is the defendant companies (and therefore, ultimately, their shareholders) who bear the
expenses associated with settling the case.
Fourth, the Court has discretion to award attorneys’ fees “based on the reasonable
value of legal services rendered” by counsel for a lead plaintiff. C.P.L.R. 909. Such awards are
the linchpin of Brualdi Brand litigation and are what have enabled the Brualdi Law Firm’s
scheme to succeed. And his success comes at the expense of the companies he sues and the
shareholders he owes an ethical obligation to represent. It also comes at the expense of the
courts and the public, whose confidence in the judicial system and the law is undermined when
lawyers attain such windfalls.
It is critically important that New York remains a welcoming place for companies
and individuals to conduct business, establish offices or become incorporated or organized. This
objective is premised in no small part on the sophistication, fairness and transparency of its
courts, and, especially for large businesses, of the Commercial Division of this Court. This State
and its courts would be diminished if the Brualdi Law Firm’s brand of litigation became an
established feature of their jurisprudence.
23
Dated: New York, New York
August 15, 2014
Respectfully submitted,
/s/ Sandra C. Goldstein
Sandra C. Goldstein
Gary A. Bornstein
CRAVATH, SWAINE & MOORE LLP
825 Eighth Avenue
New York, New York 10019
(212) 474-1000
Attorneys for Defendants C. Howard Nye,
Stephen P. Zelnak, Jr., Sue W. Cole, David G.
Maffucci, William E. McDonald, Frank H.
Menaker, Jr., Laree E. Perez, Michael J.
Quillen, Dennis J. Rediker, Richard A. Vinroot,
and Martin Marietta Materials, Inc.
/s/ Rachelle Silverberg
Rachelle Silverberg
WACHTELL, LIPTON, ROSEN & KATZ
51 West 52nd Street
New York, NY 10019
(212) 403-1000
Attorneys for Defendant Texas Industries, Inc.
24